If you’re not stoked about taking 25 years to pay off your mortgage, we’re about to show you how to speed up the repayment process.
Just one thing, it may not be in your best interest.
Trying to shave years off your mortgage and thousands off your interest costs makes intuitive sense. And many homeowners do just that. In fact, about a third of mortgage holders took some form of action to shorten their amortization period in 2019, according to data from Mortgage Professionals Canada (MPC).
Here’s a look at how you can do it, and when you shouldn’t:
1. Boost your regular monthly mortgage payments.
Most lenders let you increase the amount you pay towards principal by between 10% and 20% of the current monthly payment amount. Some also offer what’s known as a “double-up” payment option, allowing you to pay up to double your regular amount.
In both cases, the money you pay goes directly towards paying down your principal balance. About one million mortgage holders voluntarily increased their regular monthly payments in 2019, with the average amount being $370.
2. Make annual or semi-annual lump sum payments.
Similar to increasing your payment amount, lenders also let borrowers make lump-sum prepayments. Those payments range from 5–30% of your starting mortgage balance.
More than 900,000 borrowers made lump-sum payments in 2019, with the average amount being $19,100. But you don’t need such a large “lump” to take advantage of this prepayment feature.
For example, if you put just $2,000 towards a $250,000 mortgage each year over the life of the mortgage, your mortgage would be paid off in 21 years rather than 25.
DOT Tip: If you want to see how much lump-sum payments can shorten your mortgage, check out RATESDOTCA’s Mortgage Payment Calculator.
3. Accelerate your payment schedule.
Increasing the frequency of your mortgage payments is another way to shorten your amortization period. One example would be switching from monthly (12 per year) to accelerated bi-weekly payments, which result in you making the equivalent of one extra monthly payment per year (the equivalent of 26 accelerated bi-weekly payments). This typically reduces your amortization by roughly 2.5 years.
4. Refinance/renew into a new term
This one’s obvious, but simply refinancing into a cheaper rate or choosing a shorter amortization (15 years instead of 25, for example), will automatically increase the amount you pay towards principal each month. If you lower your amortization, however, you’ll need to qualify at those higher payments. And unlike the payment increase option above, there’s no going back to lower monthly payments once you reduce your amortization.
Find a mortgage broker
Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.
Here at RATESDOTCA, we compare rates from the best Canadian mortgage brokers, major banks and dozens of smaller competitors.
So, should you pay down your mortgage more quickly?
Slashing interest costs sounds good on paper, but it’s not always smart.
It’s one thing to want to retire your mortgage debt faster when interest rates are high. But today, they’re near historic lows. Most rates for new customers are now below 2%, with some variable products even under 1%. That’s just about as close to free money as you’ll see in your lifetime.
You’ve got to ask yourself, is there something I could be spending my money on that has a higher return than my mortgage?
With rates so low, it often doesn’t make sense to divert your free cash towards your mortgage. Why? Because that money can work harder and earn/save you more by either being invested, or used to pay down higher-interest debt, like credit cards.
If you currently have balances outstanding on a credit card charging you 19.9% (or more), it makes little sense to prioritize paying down your mortgage at 2–3% or less.
One other thing most people forget is that (assuming you don’t increase the mortgage) mortgage payments don’t increase. But inflation and incomes do.
That means the longer you wait to pay off your mortgage, the more of it you’ll pay with future dollars. Those future dollars are worth less since the cost of living keeps going up. So, what you’re left with is a mortgage payment that becomes a progressively smaller portion of your budget. Meanwhile, money that you divert from your mortgage to other investments can grow at a materially higher rate than the rate of inflation, building you a bigger overall net worth later on, despite all the extra interest you’ll pay by slowing your mortgage payments. (DOT Tip: Chat with a financial advisor to get some good, personalized advice on this.)
Of course, if it makes you feel better to shorten the countdown to your mortgage-burning party, then by all means, take advantage of one of the options outlined above. Getting the debt noose off your neck generates a “mental” benefit that sometimes trumps financial ones.
